By Sean Sutton Private money, a term often used for non-bank, non-agency loans, is one…
Property Managers and Their Client’s Portfolio
Oftentimes, when speaking with property managers, a crucial link in the single-family asset class, many questions that arise. One of the most frequent is, “Why are you talking with me?” or “How does this benefit my business?” In addition to being a good steward of their client’s properties and effectively managing the properties to a profit, one of the most important ways a property manager can add value to their platform is through education.
Many single family investors are passive investors, meaning that they are not involved in the day to day operations and that their rentals are a secondary source of income; these investors may not be aware of many of the tools in the marketplace to lift their portfolio and increase returns.
While many investors still buy properties with equity whether borrowed equity from friends and family or their own funds, one of the most effective tools for increasing returns is leverage, or better-stated debt. By incurring debt on an investment, the investor is using only a small portion of the equity investment to finance rental property loans, with the majority of the capital being provided by the lender.
With this structure, the investor’s own funds are able to go much further, whereby allowing them to increase the size of the portfolio with the same amount of investable capital.
Investment Property Financing Options
In looking at a debt products there are several different formats, and each one has pros and cons depending on the lifecycle and goals of the investor’s portfolio.
Conventional Financing: This financing is provided by government-backed entities like Fannie Mae and Freddie Mac: These loans typically have a 30-year amortization, up to 70% LTV, and rates that are slightly higher than an owner occupied property. The drawbacks are that these agencies limit the amount of properties that are allowed on the program to 10.
Additionally, borrowers must qualify based on personal financial information including income, credit, reserves. These loans will also report on their personal credit report, potentially limiting their borrowing capability for other types of loans in the future.
Community Banks: Like the governmental agencies, community banks offer favorable terms to their clients, by way of lower interest rates and higher LTVs. They are also able to offer more than a permanent loan by way of lines of credit to purchase properties. The community bank is not without its drawback however. The majority of community banks keep these loans on their books, meaning that they hold the client to very high underwriting standards, and many times require a prior banking relationship with the client in addition to significant depository accounts.
Furthermore, because these community banks are highly regulated by the FDIC, they regularly have to move loans on and off the books to stay within their appropriate capital ratios. What this means is that while might be able to get a loan today, there is no guarantee that that same loan will be available next month.
Commercial Financing: This type of lending has been around for several years for owners of commercial real estate (apartment complex, office building, retail strip center). It is only recently however, that this financing has become available for investors of single family rental properties. Commercial lending comes in two forms (bridge lending for acquisition and term lending for stabilized portfolios) and is true cash flow lending, whereby the underwriting leans more heavily on the cash flow of the investment and the value of the collateral and less on the underwriting of the individual.
Borrowers are no longer constrained by personal income, DTI ratios, credit score thresholds, 10 property maximums. Additionally, commercial loans do not require a prior banking relationship or depository accounts to get started and do not report on the personal credit of the sponsor, freeing up future borrowing capability. Rental property financing lenders such as CoreVest can now help these owners take advantage of commercial loans with 30-year amortizations and low-interest rates.
Educating Your Clients
The above then ties back to the original question. Through a familiarity with lending products and an understanding of where the investor is in the lifecycle of the portfolio and the overall goals of that portfolio, the property manager is better able to introduce options that the investor may not be readily aware of.
What better way to increase the number of units under management than to be looked at as an advisor and become a strategic partner to help your existing clients grow their portfolios?